German union, employers reach wage deal following strikes

German Chancellor Angela Merkel attends a joint statement after the exploratory talks between Merkel's conservative bloc and the Social Democrats on forming a new German government in Berlin, Germany, Friday, Jan. 12, 2018.Markus Schreiber / AP

FRANKFURT — Germany’s biggest industrial union and employers have reached a wage deal that gives workers the equivalent of 3.5 per cent annual raises over a 27-month period and the chance to work a 28-hour week for up to two years.

Such wage gains could boost an already strong Germany economy by increasing consumer spending. And if they spread to other sectors and countries, they could raise inflation across the 19-country eurozone from its current weak levels, something the European Central Bank has been trying to do for years.

The IG Metall union and employers in southwestern Baden-Wuerttemberg state, home to major employers such as automaker Daimler AG and components and technology firm Bosch, agreed early Tuesday on the regional deal, ending a dispute that had seen 24-hour strikes at targeted firms. Regional agreements are typically applied across the whole country and some 3.9 million industrial workers.

The deal involves the possibility of more flexible working hours, a contentious issue in a strong economy with some firms running at full capacity and facing shortages of skilled workers in some areas. Employees won the right to the shorter week while employers will be able to put more workers than before on longer 40-hour weeks. The deal runs through March 2020.

Wage increases could have a broader impact if they spread to other sectors and countries and push inflation higher across the eurozone. The European Central Bank has been struggling to raise inflation toward its goal of just under 2 per cent, considered best for the economy. It was an annual 1.3 per cent in January. Inflation has been slow to pick up despite strengthening growth, and the ECB has continued pumping newly created money into the economy through bond purchases in an attempt to push it higher. It says it will continue the purchases at least through September.

The wage increases could help boost already-strong domestic demand in Europe’s largest economy. Germany’s economy grew 2.2 per cent last year and unemployment was only 3.6 per cent in December. Across the eurozone, however, the rate is 8.7 per cent, with pockets of much higher unemployment in places such as Greece and Spain.

ECB President Mario Draghi said at a news conference on Jan. 25 that whether any IG Metall wage increases spread to other countries “will depend very much on the conditions of the labour market.”

He said that “clearly in Germany, the labour market is experiencing pretty tight conditions. In other countries the labour market’s slack is still pretty wide.”

The union said the shorter week would let workers better balance work and domestic life, especially for those including caring for children and the old. The contractual week is 35 hours in western Germany and 38 hours in the eastern regions.

Workers actually get a 4.3 per cent raise on April 1 and from 2019 a mix of additional fixed payments that average out to 3.5 per cent in annual raises over the 27 months of the deal, according to analysts at Commerzbank. The union originally asked for 6 per cent.

Companies had balked at the union’s demand for extra pay for those working the shorter week to even out the lost income for those caring for children or the old and for those on late shifts. The union at least partly won that demand through a system in which workers can turn a fixed amount of pay into time off on favourable terms, according to the Commerzbank analysis.